Sunday, March 02, 2008

New reasons to take NYT private

If the Ochs-Sulzberger clan wants to shield the New York Times from the pressure mounting from increasingly restive investors, the family needs to consider more urgently than ever the idea of taking the company private.

Unfortunately, the double-whammy deterioration of the financial markets and the company’s performance over the last year would force the sale of even more of NYT Co.’s assets today than might have been the case if the family had decided before now to silence its critics by purchasing the shares now owned by public investors.

We’ll discuss in a moment the wrinkles that would complicate an effort to take the company private. But the case for taking the company private, a notion that kicked off a controversy when first broached here in April, is more compelling than ever. And it is this:

Even though the family has decisive control over NYT Co. as the result of a two-tier stock structure that gives it twice the voting power of all the public shareholders put together, the company has been under sustained assault for more than a year by activist investors who believe the business is being poorly managed.

Chief among the investor complaints is that the company’s stock has declined by 54% since the end of 2004, closing Friday at $18.69 per share. Making matters worse, nearly a third of the $3.1 billion in market value lost since 2005 has vaporzied in the last 12 months.

While disgruntled investors can’t engineer a sale or takeover of NYT as long as the family hangs together (something that proved to be beyond the Bancrofts when Rupert Murdoch zeroed in on Dow Jones), the continued public flogging by aggrieved shareholders is not only demoralizing to the NYT’s besieged management but also a major distraction for a company trying to defend the nation’s newspaper of record against the myriad challenges assailing the industry.

The management and board of NYT Co. barely survived a symbolic vote of no confidence at the annual meeting in April, 2007, when 42% of the investors holding common shares voted against the directors nominated by the family for the four seats on the 13-person board allotted to public shareholders.

The family controls the other nine board seats, giving it ultimate authority. But that has not stopped activist shareholders from raising a ruckus.

The unprecedented challenge against NYT management last year was led by Morgan Stanley, which bought 7.2% of the company’s stock to ensure it got management’s attention. Although Morgan Stanley gave up and quietly liquidated its position last fall, the global investment giant soon was supplanted by a new, and more aggressive, group of shareholders

The new investors are Firebrand, a small New York-based investment strategy firm, and the $20 billion Harbinger hedge fund. To prove they aren’t messing around, the investors have paid exactly $487,122,157.68 over the last year to acquire 19% of NYT’s shares, according to a filing Friday with the Securities and Exchange Commission.

Now, Firebrand-Harbinger are seeking to put four of their own directors in the seats representing common shareholders on the NYT board – a proposal that to date has been spurned by the company’s management. Undeterred, the activists have responded by commencing a proxy battle in hopes of gaining control of the disputed seats.

“The future of The New York Times depends on the willingness of its management and board of directors to take bold action to adapt to the changing media landscape,” says a document filed by the activists last week to formally solicit votes for their slate of directors. “We believe that this challenge requires fresh, independent leadership in the boardroom.”

Unless something gives between now and the annual meeting on April 22, it is quite conceivable, based on last year’s close vote, that a majority of the common shareholders could line up behind the Firebrand-Harbinger slate to install some or all of its four nominees on the NYT board.

How big of a difference could four directors make on a 13-person board? Well, a year after becoming directors at Gateway, two of the very same individuals vying for NYT board helped steer the struggling computer manufacturer to a merger with a competitor, Acer.

Sources familiar with the thinking of the Firebrand-Harbinger group have indicated (details in this post) that the activists aren’t interested in pushing for the breakup of NYT Co. in the ways that disgruntled investors forced the liquidation of Knight Ridder and the eventualleveraged buyout of the Tribune Co.

But the appearance of a covey of inquiring, if not to say querulous, directors is bound to lead to many more spirited discussions than usual at future NYT board meetings.

So, what would you do if you were a wealthy and powerful publishing scion like Arthur Ochs Sulzberger Jr.? Put up with it? Or, buy the outstanding common shares of the company so you could take the business private and run it as you and your family see fit?

The problem, as noted at the outset of this article, is that the credit crunch since the subprime debacle this summer has made the market for a going-private transaction far less hospitable today than it was a year ago.

The good news, if you want to call it that, is that the value of the NYT Co. has declined so much in the last year (nearly 25%) that it would cost less to buy the company today than it would have 12 months ago. But the deal still wouldn't be cheap.

To gain complete and uncontested control of the New York Times in the current market environment, the family would have to sell almost all, if not all, of such assets as the Boston Globe; its regional newspapers in Florida and California; the International Herald Tribune, and the spiffy, new Manhattan skyscraper that serves as headquarters for the company and its flagship paper. Here’s why:

As you can see from the table below, the total market value of the shares owned by public investors in NYT has fallen by 24.7% in the last year to $2.68 billion as of Feb. 29, 2008, vs. $3.56 billion on Feb. 28, 2007.

If the family wanted to take the company private by buying all the outstanding common shares for 20% more than their current value (the minimum acceptable premium in such a transaction), it would have to pay $3.2 billion to take the company private while assuming the $1 billion in debt the company already owes.

To finance the transaction, the family would need to quadruple the $1 billion in debt on the company’s books to $4.2 billion. Although the family might have been able to borrow $3 billion prior to the time the credit markets seized up, it is unlikely that lenders would allow the family to borrow more than $2 billion under the tighter lending standards in effect today.

The only way to swing a $4.2 billion deal when when bankers will lend only $2 billion is for the family to raise additional cash by selling such assets as NYT's real estate and non-core publishing properties.

Unfortunately, the dismal condition of the newspaper business has reduced the value of NYT’s publishing holdings over the last year.

Owing to tumbling sales and profits, I have dropped my estimate of the value of the Boston Globe and the associated New England properties to $450 million today from $650 million in the spring of 2007. Because the NYT's newspapers in Florida and California are at the two epicenters of the real estate slump, I have reduced my estimated value of the regional group to $675 million this year from $900 million a year ago. The third publishing asset apart from the Times itself is the International Herald Tribune, whose unique cachet and market position might attract a buyer willing to pay the same $150 million this year that I estimated it was worth in 2007.

Assuming the estimates are correct, the sale of the above publishing assets would realize less than $1.3 billion of the $2 billion likely to be required to take NYT private.

Unless the family wanted to take the unlikely step of selling About.Com, its principal new media asset, the only remaining jewel of significance would be the office building that opened last fall. Based on the value of a financing transaction undertaken by NYT’s partner in the project, I would estimate the publisher’s share of the building to be about $850 million.

The sale of some or all of the NYT’s interest in the building, plus the sale of the non-core publishing assets, would make it possible for the family to take NYT private, thus insulating America’s leading journalistic institution from the scrutiny and second-guessing of external investors.

The only challenges after that would be to profitably manage the down-sized company – and keeping all the family members happy about havng a substantial portion of their wealth committed to the ongoing stewardship of the New York Times.

4 Comments:

Hey Mutt, where did you come up with the $2 billion figure that NYT would probably not be able to borrow more than? Who says NYT couldn't borrow more than that amount? Where does he, or she, work? And what's the specific reason why NYT couldn't get that much, regardless of the shrinking money pot for corporate transactions like this?

In response to the above very good question, I am assuming NYT could borrow approximately five times its operating profits. Lenders, who might have given 7.5x cash flow a year ago, are more conservative today, especially given the uncertainty of future newspaper revenues and profits.

Well, it's clear what's going on: the family doesn't want to take the advice of their investors and put directors with actual Web expertise on the board (god forbid they eliminate media luminaries like the Sara Lee executives to make room!).At the same time, they don't want to put their money where their mouth is and actually invest their own money and be accountable to the strict cash flow requirements of servicing a heavy debt load. They rather bury their heads in the sand and waste investors' money while they play media moguls for as long as the gravy train will continue.

These shareholders may not be able to force the Time Company to make changes, but if the family owners aren't careful they could see a mass institutional sell off of Times stock. If you think the company's share price is dismal now, imagine what it would be if Firebrand and the rest bailed out.

About Me

Alan D. Mutter is perhaps the only CEO in Silicon Valley who knows how to set type one letter at a time.
Mutter began his career as a newspaper columnist and editor at the Chicago Daily News and later rose to City Editor of the Chicago Sun-Times. In 1984, he became No. 2 editor of the San Francisco Chronicle.
He left the newspaper business in 1988 to join InterMedia Partners, a start-up that became one of the largest cable-TV companies in the U.S.
Mutter was the COO of InterMedia when he moved to Silicon Valley in 1996 to join the first of the three start-up companies he led as CEO.
The companies he headed were a pioneering Internet service provider and two enterprise-software companies.
Mutter now is a consultant specializing in corporate initiatives and new media ventures involving journalism and technology. He ordinarily does not write about clients or subjects that will affect their interests. In the rare event he does, this will be fully disclosed.
Mutter also is on the adjunct faculty of the Graduate School of Journalism at the University of California at Berkeley.